One has to wonder, given this testimony to be given today by Paul Volcker:
The challenge is not to paper over or tinker around the edges of the broken system. We need to minimize the danger that the uncertainties and risks inherent in the functioning of a market-based financial system do not again jeopardize the functioning and foundation of our economy.
Actually, the challenge is to lock up the malefactors, liars and thieves, of which there have been and are many.
What would be the bank robbery rate were there no penalty for robbing banks? You need look no further than the so-called "regulatory framework" for the source of the problem - The Federal Reserve Act, the enabling legislation for the OTS and OCC, "Prompt Corrective Action" - all of these are great-sounding laws but none of them contain the critical clause in any law if you expect people to follow it: an "or else."
I particularly welcome the strong reaffirmation of one long-standing principle – the separation of banking from commerce – that has long characterized the American approach toward financial regulation.
The repeal of Glass-Steagall dropped the last pretense of any such thing - a law that had been wantonly and notoriously violated by the merger of Citibank (C) and Travelers and which was clearly unlawful at the time it was contemplated and entered into. Instead of swiftly applying a boot to the head of both Boards of Directors and the Chairmen of both firms the law was instead changed to make retroactively legal that which was a blatant violation of United States Law.
As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets.
Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. So should in my view a heavy volume of proprietary trading with its inherent risks. Some trading, it is reasonably argued, is necessary as part of a full service customer relationship. The distinction between "proprietary" and "customer-related" may be cloudy at the border. But surely by the active use of capital requirements and the exercise of supervisory authority, appropriate restraint can be maintained.
But left unsaid is that this "participation" in these fancy instrument inherently leads to intentional obfuscation and even fraud.
Witness IndyMac Bank. We now know for a fact (because the OTS OIG office said so) that one of the OTS officials in active conspiracy with the bank back-dated deposits to make them appear more sound and secure than they were.
This resulted in a huge loss to the FDIC's deposit insurance fund when they subsequently failed.
Nobody was prosecuted for this - even though bank fraud is a felony, and so is, post-SarBox, issuing known-false accounting statements.
But this was not just an "abstract" problem for the deposit insurance fund and bank regulation. There were hundreds if not thousands of people who lost huge amounts of money in IndyMac, as they were over deposit insurance limits when the bank failed.
ALL OF THEIR UNINSURED FUNDS ARE GONE, and many of those individuals and businesses made those deposits after the fraud occurred - that is, but for the fraud they would not have lost their money as the bank would have been closed before they made the deposits.
This is not an isolated incident; Bloomberg noted yesterday:
“The examiners should have seen a lot of this coming,” said Gerard Cassidy, an analyst with Portland, Maine-based RBC Capital Markets, an investment bank owned by Royal Bank of Canada. “I shake my head when I look at some of these failures and ask, ‘Where were the regulators?’ We’re paying a lot more than we would if they had acted sooner.”
They failed to act because they have been effectively bribed, whether through actual money or whether through a revolving-door policy and lack of enforceable sanction in their enabling laws for willful blindness is not important. The outcome is the important factor, and there the evidence is beyond question. But back to Mr. Volcker:
Quite simply, it is the Federal Reserve that has (surely should have) the independence from political pressures, the prestige and the essential qualifications of experience to serve as overseer of the financial system.
The problem with Mr. Volcker's endorsement of The Fed as a continued systemic monitor and regulator is that The Fed has intentionally ignored outrageously predatory behavior, risk-hiding, loss-hiding and even UNLAWFUL activity by some of the banks and financial institutions under its supervision, including but not limited to IndyMac's deposit backdating.
It is not possible to make a logical argument for extending supervisory authority to an organization that has shown a repeated pattern of willful misconduct, has resisted audits of its activity and has in fact made bald threats to Congress in regard to statements of their intent to exercise their Constitutionally-granted authority to execute those audits in discharge of their responsibility toward the monetary supply.
The bottom line is that our regulatory system not only has failed it continues to fail, and this is no accident. These failures are intentional acts promulgated by those in Congress and other agencies such as The Federal Reserve that have written laws in such a fashion that they are mere suggestions.
Time has shown that in practice these alleged "laws" are notoriously and openly ignored at any time powerful people decide they would like to ignore them, and this willful thumbing of one's nose to the law extends to the present day. We have financial institutions that are intentionally hiding bad assets on their books at entirely-fictional values, and nearly 100 banks have failed with their books in this state. Not one indictment for accounting or bank fraud has been brought in connection with these falsehoods.
Since almost-literally every failed banking institution thus far has disclosed losses that are dramatically beyond the "zero remaining capital" line, prior to which the FDIC should have acted, it is only reasonable to assume that every remaining bank in the system is likewise carrying some amount of underwater securities at unrealistic and fictional values. They have survived to this point only due to the Federal Government's willingness to not only turn a blind eye to blatant and outrageous false statements of "value" in these securities but due to direct and indirect subsidizations in addition to enable them to "meet" the cash-flow requirements that these securities would otherwise demand.
This in turn has resulted in consumers being faced with 20, 25, even 30% interest rates on credit cards while Fed Funds stands at 0%, effectively forcing those who are carrying balances to subsidize the fraudulent accounting that has infested our banking system.
No reform will have meaning until and unless all can trust a balance sheet. This means the end of off-balance-sheet accounting, the end of fictional claims of asset value and the end of willful blindness within our regulatory structure.
It is my assertion that the only meaningful method to enforce such strictures is to guarantee that every regulatory pronouncement and law have a strict "or else" clause imposing criminal sanction for violations, and that when imprisonment would be called for in a statute for a personal actor, when a corporation is the violator the sanction be extended to the corporation as a suspension of the firm's corporate charter for a like term of years as would be imposed on a person.
It has been proved through decades of sociological study that only the certainty of punishment deters crime. Today there is no punishment at all for violating most of the regulatory code allegedly imposed on the financial system as there is no "or else" clause in essentially any of these regulations.
This must change.